Analyst: Qantas should flood market with frequent flyer points

By David Flynn, December 12 2013

Qantas should hang onto its lucrative frequent flyer scheme and sell off "a large block of points" rather than the program itself to raise money, suggests one financial analyst.

In other words: instead of selling the goose that lays the golden eggs, just get it to lay more eggs.

42 billion more eggs, to be precise.

Commonwealth Bank analyst Matt Crowe calculates that Qantas could offer a super-sized serve of 42 billion Qantas Points to its network of retail partners, potentially raising the airline a handy $500 million in much-needed cash.

"Qantas Frequent Flyer is more valuable to the Qantas Group than it is to any other potential owner so selling part or all of it makes little sense" Crowe says of proposals to sell the scheme outright, which could carry a price tag of $1.5-2.5 billion.

Read: What if Qantas sold its frequent flyer program?

"Any potential owner would face the risk that Qantas increases the ‘price’ at which it supplies seats or even cuts off the supply of seats altogether. QFF is totally reliant of Qantas for seat so it makes sense for it to remain a subsidiary of the Qantas Group."

An alternative, Crowe says, is for Qantas to issue a significant block of points to partners.

"While this would reduce the value of existing QFF points is it probably a better option than diluting shareholders."

Here is Crowe's maths behind the move.

  • Qantas sells points to banks, credit card companies and retailers at an undisclosed price
  • However, Crowe points out that Qantas Frequent Flyer members can purchase "small parcels of points from the QFF website for 'top-up' purposes for about 2.5c per point...so the price for a 'bulk' sale would have to be materially lower than 2.5c per point. "
  • Considering that a $250 Myer gift card costs 37,500 Qantas Points at the Qantas Store, Crowe estimates that "Qantas buys points at about 0.7c per point".

Using 0.7c and 2.5c per point as the lower and upper 'cost per point' limits, for the purposes of this exercise Crowe suggests Qantas could set "a bulk sale price of 1.2c per point" to retail partners.

Qantas "could hypothetically issue 42 billion points at 1.2c per point and raise approximately $500m" Crow explains, giving the airline a much-needed injection of short-term cash "to shore up its balance sheet."

Of course, flooding the market with the equivalent of six Qantas Points for every person on the face of the earth is not without its downsides.

"Losers in the deal are QFF members who see the value of their points balance diluted as more points chase the same number of QFF seats" Crowe predicts, although he notes that "it would be virtually impossible for QFF members to determine the extent of any dilution."

"Selling points has its drawbacks – the most obvious being that it harms the loyalty that the Qantas Frequent Flyer program is designed to generate. Nevertheless, we think issuing points is a better option than selling QFF or raising equity."

Of course, that flood of points might also see many retailers ramping up their efforts to woo customers with promotions offering a slew of extra bonus points – something which savvy frequent flyers know how to take advantage of.

How do you see this tidal wave of Qantas points impacting the Qantas Frequent Flyer scheme as a whole?

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David

David Flynn is the Editor-in-Chief of Executive Traveller and a bit of a travel tragic with a weakness for good coffee, shopping and lychee martinis.

16 Dec 2011

Total posts 43

Typical of investment analysts - suggest a strategy which increases short term profits while damaging long term prospects..

Virgin Australia - Velocity Rewards

24 Aug 2011

Total posts 736

That's crazy talk, people have enough trouble redeeming seats as it is. With more service cuts coming, higher points prices and the insane fees on redemption seats the points will decrease in worth to the end member. It would just give existing customers more reasons to hate QF. 

tronixstuff, people have trouble redeeming seats on Qantas using Qantas points ;)

Many, many ways to skin a cat...

KG
KG

Qantas - Qantas Frequent Flyer

10 May 2011

Total posts 736

Agreed, redeem on EK, CX or BA is no issue.

Interesting analysis on selling points versus the FF entity, however, I don't believe in selling 42 billion points is better than raising capital the normal way. Also, I think the assumption of being able to sell at 1.2 cents is very rich. It will more likely be 0.7 or even lower. If you look at the US, consumers can buy points at 1.2 - 1.5 cents, so why would a bank buy bulk for that price? I know the market in Australia is different, but I certainly don't think banks will cough up 1.2 cents for a QF point. Also, once QF has sold their points, what prevents them to devaluate their award chart? Where does the bank stand in that case?

tt7
tt7

22 Jun 2011

Total posts 10

I don't really understand what this "analyst" is proposing.  If I remember correctly, a few years ago, AA and Citibank did a deal in which Citibank prepaid for a gazillion AA miles.  Citibank was (and still is) the biggest buyer of AA miles.  AA needed some cash so Citibank agreed to "prepay" for a lot of the miles it would be buying anyway.  AA got the short-term cash it needed -- and Citibank is in the business of lending money, so to them it was presumably just a financing and they probably got a better rate/mile than they usually get.

Does QF need cash?  I thought they had plenty (but perhaps I'm wrong) and that lack of short-term cash isn't really their problem.  Even if QF persuades anybody to buy far more QF points than they would normally (perhaps by giving them a better rate), what are those banks/credit card companies/retailers going to do with the points?  Why would they accelerate the rate at which they issue points?  Presumably they can already buy as many points as they want from QF - they would have to be offered a better rate/mile for it to make any sense for them to 'prepay' for the miles (and selling miles at a discount rate is probably not in QF's best interests unless they are really desperate for cash).  In Citibank's case, the number of miles they give out depends on the level of charges put on someone's credit card.  Citibank didn't simply give people more points for the same level of spending (why would they?) - they just prepaid for points they were going to be buying anyway and then handed out the points the same way/same timescale they always did, so it had no affect at all on the AA frequent flyer program.

01 Feb 2012

Total posts 370

I think Qantas dont need short term cash as in working capital, but in the medium term they need more capital since they are burning through it too quickly to maintain their 65% line in the sand.

Credit card companies would use it to offer bonus points for when people sign up. Oh wait they're doing that already..

Honestly I think Qantas are already doing a lot of that and at some point the demand for QFF points will fall off a cliff (both from consumers and banks). Whats next, 80,000 points for getting a 2 year mobile contract with Telstra? 20,000 points for sponsoring a world vision child? Soon companies will be giving employees bonuses in points.. at least we don't have to pay tax on that.

British AIrways

08 Feb 2011

Total posts 22

Isn't that how it is done in the US?

paa
paa

21 Dec 2012

Total posts 62

An alternate approach - directly address why people are no longer loyal to the QF international .......

Consider that QF are partly responsible for this, because they forgot that one of the key functions of the loyalty program is to estalish loyalty toward the QF flying business. Yes they needed to establish JQ to protect their group domestic market share, but they canibalised their own QF customers in the process, and for most pax they award no loyalty credit for flying JQ. This has a flow on that these customers have dimished loyalty to QF Domestic, QF international and JQ itself, and was critical error in the establishment of JQ. From the start credits and points should have been awarded for all paid JQ fares, possibly at a reduced rate such as 50%. To a great extent the horse has bolted on this one, but if my name was A Joyce, I would have fixed this yesterday.

Qantas - Qantas Frequent Flyer

19 Nov 2011

Total posts 246

there is not enough classic award seats availability with QF.

don't think QF targets at least 80% load factor. Might as well let QF FF members redeem those seats than keeping them empty.

Emirates Airlines - Skywards

07 Sep 2012

Total posts 151

Two points to consider.

1) Running their FF scheme on the basis of issuing a colossal number of new points would be akin to the way Mugabe runs the Zimbabwean economy, with a similar end result.

2) Many credit cards in Australia have seen a significant reduction in the points earned per dollar spent as 2013 has gone on. Citi's Emirates card for instance has just announced a drop from 1.5 to 1 points earned from May next year in respect of domestic non-ticket purchases. The appetite of the airlines 'partners' for points appears to be dimming.

12 Dec 2012

Total posts 938

QF may already be doing this. I have been getting a lot more emails from WoW EDR offering bonus QFF points then I used to.


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